Gold can be the silver lining of the commodity crash

Buying gold bullion, and shorting top US stock futures on the Dubai Gold and Commodities Exchange (DGCX), were the most attractive investment ideas I could glean from the third annual Global Commodity Outlook Conference held last Sunday in the Almas Tower of the Dubai Multi Commodities Centre. Apart from precious metals, the speakers had little […]

Buying gold bullion, and shorting top US stock futures on the Dubai Gold and Commodities Exchange (DGCX), were the most attractive investment ideas I could glean from the third annual Global Commodity Outlook Conference held last Sunday in the Almas Tower of the Dubai Multi Commodities Centre.

Apart from precious metals, the speakers had little good to say about the immediate investment prospects for commodities in general. The Chinese economic slowdown – which the Jain SP Professor John Talbott convincingly demonstrated to be already a recession – is to blame.

The UD Industrial chief executive John Short explained: “We think China has a cold, or maybe worse. But when China gets a cold, we get pneumonia. We are facing a very, very difficult three to four years ahead. This will get really ugly before it gets better … Asset prices are not yet at lows because we have not seen the debt defaults and bankruptcies yet.”

Demand from construction projects for raw materials like steel and copper will also dry up over the next six to 12 months as the project pipeline withers and companies run out of money, he added.

Not surprisingly for a conference about commodities, the recent collapse in the price of oil was a major focus for speakers.

Matt Stanley, a commodities broker from Freight Industrial Services, commented that even his taxi driver seemed to know the supply and demand situation in the oil market and that surely this must indicate the bottom.

However, as Eli Mashmoor, the head of futures at MJD Partnership, noted, the idea of Saudi Arabia reaching an accommodation now with Russia on supply was “absurd”, as it would mean that all the money spent so far in forcing non-Opec producers out of business was lost.

Nobody seemed too optimistic about the immediate outlook for the oil sector, so the same rule about asset prices in the sector – for example, oil major stocks – probably applies. Investors need to wait for another day to bargain-basement shop.

Iran’s return to the oil market was dismissed as irrelevant because it will take years for production increases to become significant, if the necessary US$20 billion to $100bn investment required to make it happen can even be found.

That said, the loss of sanctions is good news for trade between Iran and Dubai, and also a boost for the local gold trade.

Gold’s 10 per cent price surge since the start of this year was a standout at this conference, which was otherwise about as gloomy as you could get for commodities as an asset class. Even here, the Chinese New Year looked about to upset the party.

National Bank of Fujairah’s head of trading, Junaid Anwar Khan, pointed out that this had been the pattern in the previous two years. Nevertheless, he overlooked the very different start to this year in terms of the sharp corrections in global stock markets and weakness in the US dollar, as well as the rather startling impact of the Fed’s December rate cut on US treasury bonds.

In such volatile periods investors often move into a safe haven such as precious metals. It was certainly the feeling of this lively conference, for which 470 registered as delegates, that volatility was back with a vengeance this year and here to stay.

That was one reason why Rajab Hamed, the chief executive of the precious metals trader Sabayik Al Kuwait, thought gold would not test new lows this year but remain in a $1,100 to $1,200 an ounce trading range. “Investor demand will respond to market instability,” he said.

The Dubai gold veteran Tawhid Abdullah, the chairman of the Dubai Gold and Jewellery Group, was cautious about predicting future prices but noted that “if we get quantitative easing from the US then all bets are off”. That’s the sort of policy response that would follow another major financial crisis.

Apart from gold, the other investment option I spotted for the first time at this event was on the sidelines at the DGCX stall, which was presenting its new single-stock futures product.

Basically you can now short futures in Apple, Facebook, Microsoft, Google and JP Morgan at a low cost from Dubai. Futures offer leverage in exchange for a wipeout to the downside, but any upside will be considerably greater than just owning the stocks outright.

This is an investment for local family offices and soph­isticated investors only. But if you are convinced that a company such as Facebook, whose market valuation is presently higher than all the gold producers of the world, is overvalued, then this could be the way to go.

Peter Cooper has been a senior business journalist in the Arabian Gulf for the past 20 years.